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Structured Settlements: Pros and Cons
The constant bombardment of advertisements urging people with structured settlements to cash them in and get their money now is enough to make anyone curious. What are structured settlements? What are their pros and cons?
What Is a Structured Settlement?
Often the result of a lawsuit, a structured settlement is a legal tool used to deliver compensation to someone who has suffered an injury. With structured settlements, recipients do not get a single large payout. Instead, the awarded funds are paid out in regular increments over a lengthy period.
As with most things, there are advantages and disadvantages to structured settlements. Are you trying to decide if you should accept a structured settlement or contemplating selling an existing structured settlement? Before making a firm decision, you will want to way the pros and cons carefully.
The Pros of Structured Settlements
Structured settlements may not provide fast cash, but they do offer their beneficiaries several benefits.
The promise of years of tax-free income is definitely appealing. Structured settlements can offer significant tax benefits because personal injury settlements are not taxable. There are some exceptions, and recipients may be taxed on certain portions of the award like the interest that accrues on the settlement and any punitive damages awarded, but generally speaking, structured settlements are not subject to taxation, so agreeing to one can allow you to keep more of the money that is awarded to you.
Structured settlements protect you from more than the IRS. They offer the promise of regular income, which can provide a welcome sense of financial security. They also offer a layer of protection that can help you avoid financial missteps. For starters, recipients only have immediate access to a small portion of the settlement, so it is impossible to lose everything via bad investments or poor spending choices.
Of course, you do have the option to cash in by selling your structured settlement, but this is not as simple as the avalanche of advertisements makes it look. Court actions are required to modify structured settlements, so selling a structured settlement is not something that can be done on a whim. It requires enough time and effort to make most people carefully weigh both the decision and the potential consequences. In some cases, courts will only approve modifications to structured settlements if they are convinced that it is in the beneficiary’s best interest.
The Cons of Structured Settlements
Steady, tax-free income sounds fantastic, but nothing is perfect. What are the drawbacks of structured settlements?
Lack of Control
With the way structured settlements are set up, the funds are administered by an insurance company or some other entity, and the recipients have no say in how this money is handled. They only gain control of the money as it is doled out in their regular payments. For some people, this is a benefit because the responsibility of managing a large sum of money is not to be taken lightly. However, other people are reluctant to rely on anyone else’s judgement. They may prefer to make their own decisions about how their money is invested.
A structured settlement’s incremental payouts limit the amount of the settlement that can be spent. While this can protect recipients from spending their settlements too quickly, it can make life difficult for those who have a genuine need for the money now. Illness, unemployment, unforeseen expenses and other troubles can destroy a person’s financial well-being and create a situation where they need access to the funds that are owed to them immediately, but it takes time and effort to gain access to money that is tied up in a structured settlement. Court action is generally required to sell or modify this type of settlement.
While structured settlements are not subject to taxation, they are vulnerable to inflation. Over time, inflation can lower the value of structured payments. While the actual dollar amount of the payment will not shrink, amounts that once covered the recipient’s bills and expenses may fall short as the years pass.
Is a structured settlement a good choice? The answer depends on your circumstances. Before agreeing to a structured settlement or taking steps to sell an existing one, you will need to review the positives and negatives of this type of settlement and decide if it is a good fit for your unique situation.